Tuesday, October 22, 2013

Rationale for a Housing Recovery

The U.S. Housing market will continue to recover.

Here are two reasons why:
1.      The credit cycle is strengthening, and
2.      Inventory levels are favorable 

Nominal Mortgage rates are what we see in the newspaper. Real mortgage rates adjust the nominal by subtracting annual inflation from the median house price. That takes into consideration that debt to buy a home costs less (in real terms) as the asset being purchased increases in value.

The recent period of negative real mortgage rates signifies that people who have bought property, measured on a nationally aggregate basis, have made great purchases of property. This is one metric that actually objectively says, “…now is truly a good time to buy a home.” Despite the recent slowdown in price appreciation, the cost of financing side is still in our favor.

And for the inventory part: 

The recent housing rally doesn’t need to become as lofty as the previous to manage respectable appreciation from this point either. Fundamentally, there are reasons behind demand - income levels, ability to qualify, etc. - but technically speaking, the lack of supply issuance (above chart) suggests that there hasn’t been housing starts (construction metric) for quite some time. Due to this lag, don’t be surprised to see appreciation in housing on the fact that there is a delay to new supply (click on charts to enlarge).